Brief Equities Bottom-Up: EPG: Revising Down Earnings by 10-12% While Long-Term Outlook Still Intact and more

In this briefing:

1. EPG: Revising Down Earnings by 10-12% While Long-Term Outlook Still Intact
2. TWPC: Sign of Recovery from 4Q18 Earnings
3. PLAT: Already Priced in the Delay in Opening a New Project
4. A Comparison of Recent Visitors Trend to Korea and Japan
5. Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued

1. EPG: Revising Down Earnings by 10-12% While Long-Term Outlook Still Intact

We revise down EPG’s net profit forecast by 10-12% in 2019-21E. However, we still maintain our positive outlook toward its FY20-21E earnings driven by growth in every business units: 1) sales and margins recovery for EPP segment (22% of revenue in FY9M19) from changing its product mix toward more on food packaging; 2) consistent revenue growth for automotive and thermal insulators (50% and 28% sales contribution). The new target price at Bt9.90 derived from its 2-years average trading range of 23xPE’19E.

• A slash down in earnings to factor in lower-than-expected sales growth in Aeroflex and EPP. Meanwhile, raising up SG&A to sales ratio to reflects operation enhancement program in Australia.
• Turn bearish view toward on TJM which contributed 12% in total revenue in 9MFY19 (April-December 2018), due to difficulty in running businesses given high labor cost in Australia and production scale that still far behind the rival.
• EPP’s gross margin was already bottomed out and expect to normalize on the back of low material price sourced in 4Q18, and, higher contribution from high margin products on food segment.

2. TWPC: Sign of Recovery from 4Q18 Earnings

TWPC 4Q18 recurring profit was Bt86m (+135%YoY, +975%QoQ). The easing in cassava supply help supporting TWPC both selling volume and profitability.

• The strong revenue at Bt2.1bn (+12%YoY, +25%QoQ) and GPM at 17.2% (+0.7ppts YoY, +3.2ppts QoQ) should reflect the easing cassava supply and mark its earnings bottom out.
• TWPC FY2018 recurring profit was Bt197m (-48% YoY), largely eroded by starch industry downturn.
• TWPC announced a dividend payment of Bt0.32 (XD on 07-May-19), which is equivalent to 4.0% dividend yield.

We maintain our BUY rating with 2019E target price of Bt10.0, derived from 16.5x PE. We believe 2019 will be turnaround year for TWPC as the starch business down-cycle should have already ended. We like TWPC for its scalability with its strong brands in large markets both starch and food (Vermicelli and noodles).

3. PLAT: Already Priced in the Delay in Opening a New Project

PLAT reported 4Q18 net profit of Bt198m (-3%YoY, +6%QoQ) and in-line with our expectation.

• Slow sales growth (+3%YoY) due to the delay in opening The Market Bangkok project from Dec 18 to 14 Feb 2019 caused a YoY drop in 4Q18 performance. In summary, 2018 earnings grew 2%YoY driven by 5%YoY in sales growth. We also believe current share price already priced in this delay.
• Despite a drop in 4Q18 earnings YoY, we expect strong recovery in 1H19 earnings driven by opening The Market Bangkok (70% booked).
• We maintain our positive view toward its outlook back by the rise in average rental rate trend after long term contracts expiration in 2020-2021E.
• Announced an annual dividend payment of Bt0.2 (XD on 4 Mar), which is equivalent to 2.6% upcoming dividend yield.

We maintain BUY rating with a target price of Bt9.4 based on DCF (10.8%WACC, 0% TG)*.

4. A Comparison of Recent Visitors Trend to Korea and Japan

• In this report, we compare the recent dynamic foreign tourists trend to Korea and Japan. In January 2019, the number of foreign visitors to Japan rose 7.5% YoY to 2.69 million. A total of 0.78 million from South Korea visited Japan in January (DOWN 3% YoY) followed by 0.75 million people from China (up 19.3% YoY).
• According to Korea Ministry of Economy & Finance (MoEF), the number of people from China to Korea increased 35.1% YoY in January 2019.
• As evidenced by the better than expected Chinese visitors to Korea and worse than expected South Korean visitors to Japan in January, there is an increasing indication that this trend could continue in 2019. Many of the Korean related cosmetics stocks have positively reacted to the recent data. One of the interesting trades to be long on a basket of Korean cosmetics related stocks and be short on a basket of Japanese cosmetics related names. 

5. Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued

• Tokyo Electron (8035 JP) is a semiconductor equipment manufacturer based in Japan. The company has been operating in the semiconductor space for several decades and generates nearly 90.0% of its revenue from the sale of semiconductor equipment.
• The company revenues are highly correlated with worldwide semiconductor revenues. The current softness in the semiconductor market has already caused a decline in company earnings for 3QFY03/19 and we expect the company earnings to deteriorate further as the market has just begun witnessing the demand decline.
• Even though IoT, cloud, big data, 5G and AI are expected to drive semiconductor revenues and make up for the declining demand from smartphones, tablets and PCs, we do not expect this to drive a significant change in semiconductor demand for another few years as the technologies are still not fully developed.
• Based on our valuation, the company share price is still overvalued despite the stock losing more than 20% to-date since the market started decelerating in mid-2018. As the current semiconductor cycle nears its worst, we feel the company share price will dip further with the earnings outlook deteriorating.